Q1 2023 PrairieSky Royalty Ltd Earnings Call

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Good day, and thank you for standing by and welcome to the prescribed royalties first quarter 2023 financial results call.

At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone you will hear an automated message by senior to hand to raise your hand.

To withdraw your question. Please press star one one again please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Andrew Phillips, President and CEO . Please go ahead.

Good morning, and welcome to the Q1 2023 P. S. K earnings call on the call from Prairie Sky or Cam Proctor, COO, Pam because all CFO and myself Andrew Phillips.

Certain forward looking information in my commentary today, So I would ask investors to review the forward looking statements qualifier in our press release and M. D N a.

Liquids royalty volumes, which drove 80% of royalty revenue.

Remain at record levels after experiencing 18% organic growth in 2022, the strongest on record for Prairie Sky, We expect oil royalty volumes to grow again in 2023.

Another record quarter of land leasing was achieved in Q1 and resulted in 67, new leases with 57 different counterparties.

Leasing in the Western Canadian heavy oil fairway it remains strong.

Viking leasing is also reasonably picked up with light oil around $100 Canadian per barrel and sub one year payouts for operators on the shallow resource play.

Economic inventory for oil directed drilling has been a growing concern for north American operators.

With our large undeveloped land base, we are a natural beneficiary of operators looking to expand existing players or develop new ones.

This is evident in the volume of land leasing arrangements, we have entered into.

With decades of economic Clearwater inventory remaining in numerous new discoveries in the heavy oil region of Alberta, our owners get the benefit of strong cash flow today with a long duration attached to the shares of the business. They are.

There were 214 wells spud in Q1, which were 87% of wells with an average royalty rate of eight 2%. This is an increase of 20 wells over Q1, 2022, and an increase of two 1% and the average royalty rate for new wells on our land.

Biking light oil play with most active play with 68, well, it's about followed by the mantle heavy and light oil play with 42 wells spud in the Clearwater with 25 wells spud.

We saw activity across our entire land base again, this quarter, including the Duvernay in Bakken in Mississippi or there were also 28 natural gas falsified, including 18 in the Montney, which we anticipate will come on late in the year.

98% operating margin spill liabilities for maintenance Capex and organic growth through land leasing should continue to differentiate our business over the short medium and long term. These strong attributes of the business will lead to strong shareholder returns.

Thank you and I'll turn the call to Pam to walk through the financials.

Thank you Andrew Good morning, everyone as Andrew mentioned, there are certain forward looking information in the notes today I would remind investors to review the forward looking statements qualifier in our press release and MD&A for Q1.

Great Guy had another strong quarter generating funds from operations of $86 3 million or 36 cents per common share funds from operations were driven by royalty production revenue of $116 8 million earned on total royalty production of 24809 Boe per day, as well as $9 3 million of other revenue.

Oil royalty production totaled 12212 barrels per day in the quarter, which was up 9% over Q1, 2022 and flat with Q4, we.

We saw a number of new wells come on stream, which more than offset declines as compared to both periods.

Operational downtime at one of our thermal heavy oil projects negatively impacted the quarter by approximately 75 barrels per day and a decline in benchmark oil prices negatively impacted sliding scale royalty volumes, which were down by 67 barrels per day.

Oil royalty revenue totaled $83 8 million, which was down from prior quarters due to lower <unk>.

W Ti pricing as well as the lighter heavy oil differential.

<unk> oil price realization was 77% of Edmonton light versus our usual, 80% to 85% range with heavy oil differentials now in the mid teens price realizations are expected to return to the 80% plus range.

Natural gas royalty volumes averaged $59 6 million a day flat with Q1 and down 10% from Q4.

Q1 included <unk> 7 million a day of prior period adjustments as compared to Q4, which included 5 million a day of P. P. H.

Ppas were lower due to half a million a day fewer compliance volumes in Q1 as well as the negative impact of higher than estimated freeze off volumes in December which reduced volumes by a further $1 2 million a day.

In addition, certain of RBC royalty production volumes were fully shut in for February due to transportation constraints and started to come back on production in March reducing volumes in the quarter by approximately $1 5 million a day.

Natural gas revenue totaled $21 8 million.

The decrease from the prior quarter was primarily due to lower benchmark pricing for April .

That quarterly realized price of $4.05 per Mcf was positively impacted a certain D. C. Royalty production volumes were sold at Cmos pricing in January which averaged <unk> 21 point 20.

$21.97 per Mcf before being shut in for February .

NGL royalty volumes averaged 2664 barrels per day, which was flat with both Q1 and Q4.

NGL royalty volumes generated $11 2 million a day.

Sorry at generated $11 2 million of royalty revenue at a realized price of 46 71 per barrel.

There were 712 BOE per day of prior period adjustments in the quarter, including the gas Ppas already discussed 533 Boe per day, or 75% was from new wells on stream and better well performance. There was an additional 180 Boe per day of compliance activity.

Overall, PPA for 84% liquids the compliance group recovered missed an incorrect royalties through forensic accounting collecting $2 $6 million in the quarter.

We had another record quarter to quarter of leasing and earned $5 5 million of bonus consideration. In addition, we earned $1 1 million in lease rentals and $2 7 million in other income which included half a million a day of potash income.

900000, and fees related to licensing our seismic that third party and $1 2 million related to annual water disposal fees.

Cash administrative expense totaled $17 2 million in Q1 and included annual long term incentive payments, which were higher than the prior year due to strong share price and corporate performance.

<unk> recorded a current tax expense of $16 5 million as mentioned on our year end call entering into 2023 Gray Sky has 155 billion of tax pools to offset future taxable income so for the year. The first $155 million of cash flow before tax is tax free with remainder tax at the statutory tax rate of approximately.

23, 5%.

During the quarter price got declared dividends of <unk> <unk> per share with a resulting payout ratio of 66% excess funds from operations above the dividend were used primarily to repay bank debt, which totaled 293 4 million at March 31.

We plan to apply to the GFS ex to renew our NTIC at the end of May be NTIC is subject to <unk> approval, we will now turn it over to the moderator to proceed with the Q&A.

Yes.

Thank you as a reminder to ask a question you'll need to press star one on your telephone and wait for your name to be announced to withdraw your question Press Star One one again, please standby, while we compile the Q&A roster.

Yeah.

We have a question from Erin.

Koskey from TD Securities. Your line is open.

Thank you good morning.

My question is about the royalty rate on the new wells in Q1. It was obviously pretty strong relative to your historical run rate I guess my question is what's driving that number higher and how should we think about the new well royalty rate going forward.

Yes. Thanks for the question Darrin the royalty rate was a little bit higher we expect it to be significantly higher again in the back half of the year as well.

I think what's really driving that is the heritage asset that we acquired and the majority of leasing we've done on that is for heavy oil and at 17, 5% royalties and it's primarily multilaterally drilled so the entire Wellbore path is on the 17, 5% royalties. So that will kind of drive pardon me average royalties higher overtime, we think and then of course, you've got the Q3.

<unk> drilling, which is where the majority of the activity happens on that asset and thats predominantly at $17 five as well.

Thanks, Andrew I guess, a follow up question.

The annual water disposal fees you guys are collecting it as a new line of business that you're growing or is there something thats always been the case, but just buried in the financials.

Yes, it's always been there it's always been the case buried in the financials I think it's becoming a little bit larger.

Of our business and I think a lot of the other revenue lines should start to grow over time, including potash. We've done some recent leasing to that so we're working hard on other minerals.

Other revenues and that should it should grow over time.

Okay.

Thanks for questions.

Thank you one moment our next question.

Our next question comes from Michael Dunn with Stifel. Your line is open.

Thanks, Good morning folks just wondering if you have indications from.

The operators on your land of.

How much more you might see for I guess manville heavy oil drilling this year end.

Also on the Clearwater, the I guess, the well spud were down year over year just.

Maybe if you can you.

Speculate on how that how that might look for the rest of the year. Thank you.

You bet, Michael and thanks for the question good morning, Yes.

The manville drilling we expect to see a significant pick up just given that we had our first full year last year in 2020 with heritage asset. We're very active leasing those lands there are numerous discoveries made.

Multilateral wells drilled in different parts of <unk>, including the spark either with CCAR, the upper and lower Cummings and we expect now development to occur on a lot of those assets in a lot of the operators have told us they plan to be in growth mode, specifically with <unk>.

Narrower differentials, we're seeing now in the stronger WBI pricing, we think that holds true and then the Clearwater is more of just a timing issue.

And we expect activity to pick up year upon year based on the conversations with the operators primarily private we'll give a bigger update on that on both the mantle drilling the Clearwater at our Investor day on May 17th as well.

We will have the CEO presenting who's our largest royalty payer and fast growing royalty per.

Yesterday as well, so we should get more detail there.

Great. That's all for me thanks.

Thanks, Michael.

Thank you and I'm showing no other questions in the queue I'd like to turn the call back over to management for any closing remarks.

Okay.

Thank you very much everyone for your support and for dialing in to the conference call and hopefully we'll see at the AGM in a couple of hours.

Have a good day.

This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

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